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Has the EU Had Its Hamiltonian Moment?

06 August 2020   |  

Seven months after the first COVID-19-related lockdowns, the economic impact is starting to manifest in the numbers. The EU, one of the hardest hit regions, expects an 8.3% contraction in GDP in 2020. The decline’s potential depth, coupled with decisions countries made during the 2008-2009 global recession, has elicited yet more creative tactics from the EU to attempt to stem a longer-term pullback—the latest of which is a large stimulus package. The €750bn deal, passed in July, still requires approval from individual parliaments, but it could alter how the EU operates moving forward.

Of the €750bn total, €390bn will be offered via interest-free grants and €360bn via low-interest loans with the aim of not only supporting Europe’s economic recovery, but also bolstering the finances of some of the harder-hit and financially weaker countries like Italy, Spain and Greece. Should the deal ultimately win individual countries’ approval, some suggest we may be witnessing the EU’s Hamiltonian moment: Under the plan, the European Commission will borrow the funds as a union, then distribute grants or loans to the individual nations.  

Getting to this point proved contentious, unsurprisingly—split between the economically fragile southern countries and the “frugal four” of the Netherlands, Sweden, Denmark and Austria. For Italy, Spain and Greece, grants were critical, given their high debt levels accumulated over the past decade-plus of headwinds, starting with the 2008-2009 global financial crisis and followed by several years of various euro zone debt crises. Interest-free grants clearly provide additional support against a challenging macro backdrop without adding to existing debt loads.

In exchange, the frugal four won concessions on promised reforms from recipients, who will not only be required to submit their reform agendas in writing, but whose grants can also be stopped if another member state questions their progress toward said reforms. There is also an enforcement mechanism for non-compliance with general EU democratic values and the rule of law (a feature at which Hungary PM Viktor Orban apparently balked).

Interestingly, the package was negotiated simultaneously with the EU’s next seven-year budget. The frugal four (and Germany) were granted rebates on their annual EU dues—a decision which also means individual countries’ contributions have been settled for some time. Combined with the bloc’s new ability to issue joint debt, the EU does seem to have intertwined its individual members’ futures in a new and deeper way. To be sure, the current plan could prove temporary—as the EU currently states it is. But the door now seems open to joint borrowing if (when?) the EU is faced with some future—possibly even bigger—crisis. An interesting question is whether this also opens the door to central taxation, given the possibility that borrowing plus a fixed budget reaches an untenable point. However things go down the road, seems rather safe to say we haven’t yet seen contentious debates until we’ve seen one over centralized taxation.

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